Zero-Coupon Bond

A Zero-Coupon Bond is a type of bond that does not pay periodic interest payments (coupons) but is instead issued at a discount to its Face Value. The bondholder receives the Face Value upon maturity, with the difference between the purchase price and the Face Value representing the interest earned. For example, a bond with a Face Value of $1,000 sold for $600 matures in ten years, and the investor receives $1,000 at maturity, earning $400 in interest. Cases for using zero-coupon Bonds include saving for specific future expenses, such as college tuition or retirement, where the lump sum payment aligns with the investor’s financial goals.